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Tuesday, February 07, 2012

Negatives of Natural Gas Impact Fees

In the private marketplace, prices and profits provide critical information. Rising prices and high profits signal that suppliers should boost investment and production. On the flip side, falling prices and profits point to reducing investment and supply.

All of this is driven by the choices made by consumers, with businesses and investors making decisions and competing accordingly.

But suppliers have to consider future developments as well. That is, how the market changes, and investors, entrepreneurs and businesses that do well at figuring out where the market or industry is headed are better prepared than others.

Of course, though, misguided government policies distort and create problems in the marketplace for investors, business, workers and ultimately, consumers.

These economic facts of life are playing out in the natural gas market right now, with adjustments being made regarding production in Pennsylvania's Marcellus Shale region.

With natural gas prices at a decade low, Chesapeake Energy Corp. announced late last month that it would be reducing its natural gas production in the Marcellus Shale in terms of wells with higher costs and lower potential returns. Chesapeake is the nation's second largest natural gas producer.

At the same time, though, the longer run outlook for natural gas demand remains bullish for a variety of reasons. As noted in a recent NPR report, "Sara Banaszak, an economist with America's Natural Gas Alliance, an industry trade group, says other energy companies are doing the same [as Chesapeake], but they aren't likely to abandon shale gas. ‘Companies that are here to produce natural gas are here for the long term,' she says. ‘You know, there are micro-adjustments in the path along the way, but I think they've made their investments and I think they're going to pursue that path.' Banaszak says fracking operations are pretty flexible. ‘One thing that is good about a lot of the unconventional production is the ability to sort of scale it up and down with changes in demand and supply,' she says." For good measure, international demand exists, so U.S. firms have the option to liquefy gas and export it.

This is an excellent example of how markets work and adjust.

Unfortunately, Pennsylvania also might turn out to serve as an example of how government interference and costs can disrupt and reduce market-driven investment and production meant to meet the demands of consumers.

Legislation in being considered that could both help and hinder the natural gas industry, and the thousands of related jobs, in Pennsylvania.

On the positive side, Gov. Tom Corbett is pushing legislative leaders to make sure that any reforms limit local controls over the oil and gas industry, namely, putting in place uniform standards for when and where drilling can happen. A patchwork of regulations and requirements - not to mention local bans on natural gas production - will only limit investment, development, jobs and state economic growth. The governor is absolutely correct to insist on uniform standards, which will provide the certainty under which investment can flourish.

On the negative side, though, is the consideration of new taxes - labeled "impact fees" - on such energy production. An impact fee is an annual per well fee, with revenues presumably used to offset any drilling related costs on local government.

As reported by, Governor Corbett proposed impact fees in October: "The Corbett fee would be imposed and collected by counties. It would place a $40,000 levy on wells during their first year of production. That number would drop to $30,000, and then $20,000, during the second and third years. From year four through ten, energy companies would pay $10,000 per well."

Such a tax is highly dubious, to say the least, especially given the added tax revenues generated from increased economic activity. And one of the dangers is that other elected officials will push such taxes even higher. And that is exactly what's going on. The Pennsylvania state senate has proposed impact fees equal to $360,000 per well over a decade. That's 125 percent higher than the governor's plan.

Recent reports point to a possible compromise at $260,000 per well over a decade - which is still 63 percent higher than what Corbett called for initially.

Jacking up fees quite simply means raising costs for producers, which in turn can mean reduced investment and production, and therefore, fewer jobs and less economic activity.

If Pennsylvania's elected officials want to see investment, the economy and jobs grow in the state, then the right reform combination is to create a stable regulatory environment with uniform drilling standards across the state, and either killing the idea of impact fees or capping them at very low levels.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

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